Oil: Buy Later, Pay Now.
Written by Julian Wheeler – Partner and US Equity Specialist
Everyone surely remembers (now former) Fed Chairman Jerome Powell refer to high inflation as being ‘transitory’ as he grappled with the post- Covid spike in prices. With the benefit of hindsight, of course, it proved rather more stubborn and he has acknowledged that by beginning only in November 2021 he was late to raise rates from their never-seen-before (and never to be seen again?) levels of close to zero where they had sat for the previous eighteen months. As a result, it then required a stiff tightening cycle to ‘catch up’.
But what is less well known is that he first used that same word to describe a period in 2019, when inflation was briefly running below the official Fed target of 2%. Perhaps then too, it might also have been transitory and swiftly reversed direction if the world hadn’t suffered the calamity that followed which changed all those assumptions.
And now, for the third time in a decade, we are back at that point where the Fed and investors are both hoping that the inflation we are witnessing today is once again ‘transitory’. As measured by the US CPI, it now stands at 3.8%, the highest level seen for 3 years and so Treasury yields are heading to a similar position reflecting the upward pressure this is placing on the cost of capital. The stock market, on the other hand, has marched ever higher, driven by buyers of those companies with an “AI” halo attached to them; everything else is doing rather less well.
What should you do about it if you are more than a little concerned that ‘transitory’ may prove a bit more like a rainbow, where the end of it keeps moving away from you. Well, you may have noticed that Gold has been falling and is not performing its inflation hedge role for which it is often credited. For the reason why that is and other insights about its prospects for both long and short term, I recommend our latest ‘Expert Network’ podcast with John Reade of the World Gold Council on Spotify here.
Instead of Gold, I suggest you consider what is referred to as its black equivalent: Crude Oil. Not only is it better as an overall inflation hedge, but we have an obvious problem with its current supply. Oil inventories that are visible are declining rapidly, at double the average pace since before the conflict began, but notwithstanding the price rise so far, it is not yet causing alarm because a sizeable buffer was built up in advance and so far this Iran ‘excursion’ has only occurred during Spring, which is the season of lowest global demand. It’s been Goldilocks time: not too hot or too cold.
But now the USA is about to enter ‘driving season’ pushing up gasoline demand. Boston (and London) hit record May temperatures in the last week and New England turned to oil to make up a power shortfall. In short, there is little evidence of any demand destruction: the price hasn’t been high enough for long enough.
In March 2020, the world closed for Covid which caused the biggest demand shock ever seen and as many may recall, the unthinkable happened and the price of Oil traded at a negative value. But it didn’t do that until July: so it took four months for the worst of the effect to feed through the system. Granted that this current situation is not of the same magnitude, but how much easier was it for the producers to turn off the supply taps than it will be for people to ‘not use’ Oil? How high does the price have to go before you think of NOT driving your car, or not boarding that plane for your holiday? The old commodity trader adage “the cure for higher prices is…. higher prices” hasn’t yet been reached.
Ah, you say, but aren’t you a bit late? We know this – look at the price: it is already over $100! Well, yes, it is in one sense, but also no it isn’t. Without getting too detailed the price of a commodity depends upon WHEN you want to buy it. This is one of those times when a picture might help.
That line below joins the dots that mark the price of Brent Crude at different months in the future. As you can see, the price drops dramatically for each of the next few months ahead ($106 today is $88 at year end) which reflects the market view that these issues are – shall we say “transitory” – and will be resolved relatively soon. If so, the price of Oil THEN will be much lower than it is today.
Source: Bloomberg, 21st May 2026
And this is where the title of this piece comes in: pay for oil now – but buy it for a later date, somewhere down that curve. Every time a month passes without a resolution the line pulls one point to the left. Trump tells us it’s all about to end but last week, there was talk of Iran and Oman discussing a permanent toll on anything passing through the Strait of Hormuz.
The current estimate is that even if the Don and the Ayatollah took tea and shook hands, it would take until October to return to anything like normal. So that’s your best case and I suggest the chart reflects that – what is the worst one?
For more background on our U.S. market views, visit the Over the Pond archive.
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